{"id":21652,"date":"2021-08-26T08:55:01","date_gmt":"2021-08-26T08:55:01","guid":{"rendered":"https:\/\/tata-blog.osian.dev\/blog\/?p=21652"},"modified":"2021-08-26T08:58:06","modified_gmt":"2021-08-26T08:58:06","slug":"increasing-credit-gap-for-msmes-how-it-can-be-addressed","status":"publish","type":"post","link":"https:\/\/tata-blog.osian.dev\/blog\/loan-for-business\/increasing-credit-gap-for-msmes-how-it-can-be-addressed\/","title":{"rendered":"Increasing Credit Gap for MSMEs & how it can be addressed"},"content":{"rendered":"\n
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The Micro, Small and Medium Enterprises (MSME) sector plays a vital role within the Indian economy. While the pandemic and the aftermath of restrictions to curb the coronavirus has been hard across enterprises, its impact on small businesses is particularly marked.<\/p>\n\n\n\n
The significance of MSME contribution is not unnoticed and has been a focal point for Government\u2019s initiatives for a while now. In June 2019, the Expert Committee on Micro, Small and Medium Enterprises, headed by UK Sinha, submitted a proposal to the RBI Governor with some critical observations about the sector. \u201cDue to their informal nature, MSMEs lack access to formal credit as banks face challenges in credit risk assessment owing to lack of financial information, historical cash flow data, etc. Further, very few MSMEs are able to attract equity support and venture capital financing,\u201d stated the report, highlighting the need for credit access in the sector.\u00a0<\/p>\n\n\n\n
The report quotes that the \u201ctotal addressable demand for external credit is estimated to be \u20b937 trillion while the overall supply of finance from formal sources is estimated to be \u20b914.5 trillion Therefore, the overall credit gap in the MSME sector is estimated to be \u20b920 \u2013 25 trillion\u201d. Since access to credit is the lifeblood of any business, it is in the interest of the economy that the MSMEs have adequate funding to flourish. <\/p>\n\n\n\n
Here are a few ways the credit gap can be addressed: <\/strong><\/strong><\/p>\n\n\n\n
MSMEs may tend to borrow from informal lending systems without formal access to funding. However, such access to traditional credit requires formalisation and standardisation of small businesses\u2019 balance sheets and books of accounts. The introduction of the GST may have transitioned many transactions into the formal purview, but a lot still needs to be done. <\/p>\n\n\n\n
The regulatory framework that records and discloses financial transactions within a financial accounting and recording system could help lenders make better credit assessments. First, however, there has to be compliance from MSMEs and a willingness to access the advantages of formal credit. <\/p>\n\n\n\n
Leveraging technology<\/strong><\/h2>\n\n\n\n
The use of technology-enabled systems to reach out to customers has been a game-changer. Traditionally, customers relied on branch-based interactions with representatives from local banks and NBFCs. Digital platforms have made physical presence redundant and eliminated the restriction posed due to geographical boundaries. <\/p>\n\n\n\n
Besides, due to increased internet penetration, smaller players in remote areas can access the best and most competitive formal line of credit. <\/p>\n\n\n\n
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